Flexible spending accounts (FSAs) are tax exempt accounts where employees of sponsoring employers are able to set aside a portion of their salary to be spent on medical expenses in a given year. Expenses that are eligible to be paid by the money in a flexible spending account must be incurred within a specific term associated with the account balance (e.g., a calendar year). Any dollars not spent by the individual revert back to the sponsoring employer at the end of that calendar year. Studies have shown that a significant portion of the dollars allocated to an FSA often go unspent. Thus, there is salary not being realized by those employees who do not use up their FSA account balances in a given year.
Several reasons may exist as to why employees tend to forego spending all of the money allocated to an FSA account including the length of time between FSA qualifying transactions, the relatively low dollar value associated with the FSA account itself or with certain FSA qualified expenses, apathy in budgeting or tracking a balance associated with the account, etc. Other account holders of accounts similar to FSAs, such as Health Savings Accounts (HSAs), which are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis, encounter similar issues to that of FSA account holders that cause their users to not utilize the full benefits of their accounts.